NetZero and Juno combined last year to form United Online. The company offers limited free access as well as a bargain-priced unlimited service. It seems well positioned to take advantage of growing customer dissatisfaction among the major, overpriced ISPs.

The good old dazeIt's hard to forget those crazy, hazy days when the dot-coms ruled Wall Street and all things Internet were gold. Traditional valuations were thrown out the window as investors tolerated big losses and ugly balance sheets while their companies made a mad dash for market share.

One of the now-defunct artifacts from that age is the free Internet service provider (ISP). (I don't know why, but I still think "World Football League" should follow every mention of "now-defunct.") The free ISP business model was fairly straightforward: Users received unlimited dialup service in exchange for enduring advertisements, usually in the form of a box or bar across the top of the screen. The companies hoped the advertising dollars would more than make up for the cost of providing the ISP.

Some of the free ISPs were bearable, even for the heavy surfer. Before broadband came to my area, I used the 1stUp service -- owned by CMGI(Nasdaq: CMGI) and offered through AltaVista. I could stay online several hours a day with no problems, and the ad bar wasn't bad. The constant recycling of the advertisements slowed things down somewhat, but not to any great degree. It was a good-enough service to drop my regular dialup ISP.

At the time, the many free ISPs were putting a scare into the pay services. Some even wondered how mighty AOL(NYSE: AOL) would be able to keep growing; surely more and more users would be drawn to the free services! A major turning point was at hand. It was fun to speculate what the landscape would look like once the dust had settled. Some thought that at the very least prices of the pay services would plummet. The other side disagreed, and pointed to the "stickiness" of providers like AOL. The battle lines were drawn.

But a funny thing happened on the way to the war. The economy faltered, the online ad market went into the crapper, and free ISPs saw their revenue streams slow to a trickle. One by one, these providers either went belly-up or altered their business plans. For the consumer, free was not to be -- at least not in the unlimited sense.

The falloutNowadays, you can still find some free, limited services that restrict the number of online hours. But virtually all of these providers offer longer or unlimited access for a fee. The biggest names to survive are NetZero and Juno, which combined about a year ago to form United Online(Nasdaq: UNTD).

The company has a decent business plan. NetZero offers 10 hours of free access per month. If you need more time, or want to avoid the advertising banners, it will cost you $9.95 per month. Juno, on the other hand, has no set hourly limit for its free service, though it does all it can to get users to pay up. The company admits it occasionally imposes "restrictions and limitations" on its free users. An upgrade to the $9.95-per-month Juno Platinum will get you more phone lines for easier access, supposedly on a "priority" basis. It claims the pay service allows "faster page loads." The ad bar also disappears and Juno says you'll get less junk email.

As of March 31, the two services had a combined total of 5.2 million active users. Some 1.6 million of those are paying subscribers. For comparison, EarthLink(Nasdaq: ELNK) has 4.9 million subscribers, and AOL over 34 million. While EarthLink has actually lost dialup subscribers over the past year, United Online is growing.

Appealing to the pocketbookWith momentum from the merger and a growing base, the company has launched a television advertising campaign highlighting its low-cost access. You've probably seen it: "What do you call someone who pays double for Internet access? An AOL user!" Indeed, the comparison is rather damning, and most dialup users are paying far more than they need to.

AOL charges $23.90 per month for its standard plan. Microsoft's MSN checks in at $21.95, as does EarthLink. All things considered, the $9.95 monthly fees for NetZero and Juno are a downright bargain. What do the higher-priced ISPs offer that's worth 120% more? Nothing, in my opinion. The outrageous fee AOL is able to extract from its subscribers is a glowing testament to the company's brand, but not to any value it offers above and beyond the other services. Indeed, a widely reported study from the research firm ChangeWave says 40% of AOL users rate the service "unsatisfactory," and nearly 60% say they plan to leave for another ISP. One can hardly believe AOL will lose anywhere near that many subscribers, but it's reasonable to conclude that, by and large, folks just aren't wild about the AOL experience.

If United Online can convey this message to the masses, it will be in great shape. Not only would it be able to increase revenue through subscriber growth, but it's also reasonable to think that at some point in time the online ad market will rebound, giving the company a double shot in the arm. (Despite the current sorry state of advertising, about 15% of United Online's revenue comes from advertising and other commerce.)

FinancialsPotential investors in United Online can't make easy historical comparisons when trying to ascertain potential subscriber growth, revenue growth, etc. The NetZero-Juno merger was consummated just nine months ago, and the numbers prior to the marriage are for NetZero only, while post-merger numbers reflect results from the combined company.

Still, we have combined results from two quarters now. Revenue increased 6% during that time, while net loss improved drastically from $15.7 million to $7.3 million. In addition, the company generated positive cash flow during the most-recent quarter. The balance sheet is in good shape with $125 million in cash and short-term investments and no long-term debt.

United Online has an increasing subscriber base and improving financials. It's already a major player in the dialup industry, and with its low prices it stands to benefit from any trend that sees users finally waking up and realizing they're paying way too much for Internet access.

Rex Moore surfs the Net via cable broadband, and uses free NetZero as a backup. At the time of publication, he owned no companies mentioned in this column. His holdings and the Fool disclosure policy are now available in living color.